Financing Utility-Scale Solar in the Years Ahead

Utilities are procuring less large-scale solar and offtake rates are dropping, but there are still ways to move ahead, according to a panel of experts at the recent GTM Solar Summit.

Hecate Energy does not wait for utility RFPs, according to Fazli Qadir, the firm’s CTO and EVP of EPC. Instead, the company has gone to places in the U.S. where solar is not yet built out. With offtake rates in the low $50-per-megawatt range, “it’s harder work,” he said. “But the deals are there.”

Financing is still easier with big projects, according to Morten Lund, a partner with Stoel Rives. Development challenges are still significant for PV projects greater than 100 megawatts because of the existing 2.8-gigawatt pipeline, but the money will come if the project is finance-ready.

Smaller projects have to be “extra good” because there is a limited pool of tax equity.

“Bank of America, Citibank, and the big European banks will show up with big money, but they don’t want to be involved with smaller projects,” Lund said. “US Bank and Wells Fargo and Union Bank, the banks that provide tax equity to the midsize portfolios, are a smaller group.” “Good enough” is not good enough — the projects have to be “better than the others.”

Some developers are considering projects without PPAs that they will put into service in time to qualify for the 30 percent ITC before it drops to 10 percent after December 31, 2016, according to Cory Honeyman, solar analyst with GTM Research. Such merchant projects would capitalize on solar’s high peak demand value by selling into electricity spot markets until PPAs are procured.

“We have looked at places where merchant [projects] for avoided cost makes sense,” Qadir said. Those opportunities exist where “locational issues” make solar competitive with the natural gas price.

Why not wait until a PPA is available? Lund asked. By going merchant, “I might squeeze some more dollars, but I would face more risk, and that’s not a good thing, because I like safe.”

DOE is working hard to get prices even lower and making “real progress” on bringing down the high costs of equity and debt capital. Meanwhile, the emergence of the YieldCo, which is a “synthetic MLP,” will make a completed project “a dramatically more valuable asset.” Within six to twelve months, Davidson predicted, there will be “a robust competition among YieldCos to attract solar assets.

“Every developer would like a sugar daddy,” Lund said. But solar has always grown through vertical integration, and most successful players “are on the lookout for strategic relationships.” That will continue to move the market in the buyer’s favor, Lund predicted.

Buyers which are either construction companies or suppliers or finance companies want a project that fits their primary need. The development is the secondary gain. They look for projects that fit their “flaw acceptability.” Sellers up against timelines have to take buyers that accept their flaws, Lund contended, adding, “The buyer can ruthlessly squeeze them.”

The Loan Program Office’s just-announced solicitation for up to $4 billion to support renewables and energy efficiency will focus on grid integration and grid storage, Davidson said, “to help the solar industry add ancillary services so they can get higher offtake agreements and make their deals financeable.”

The LPO supported five now-completed projects, and today, virtually any bank will finance such a development-ready project. LPO backing also helped prove CSP technology, “and we are waiting for the commercial banks to pick it up,” Davidson added. By serving both the renewables and utility industries, the new grid integration and storage solicitation will have a similar impact.

“It can be very challenging to even define what storage is,” Lund said skeptically. “People will be bidding on entirely different things in these coming solicitations.”

With new storage mandates in California and New York, innovative technologies will get offtake agreements. But first deployments are expensive. So LPO backing for those technologies could “take storage to the next level,” Davidson said. ”If we can help prove out a couple of commercial technologies, after the first or second or third deployment, it becomes replicable, and that is when the costs are driven down.”

Herman K. Trabish, D.C., was a Doctor of Chiropractic in private practice for two decades but finally realized his strategy to fix the planet one person at a time was moving too slowly. An accidental encounter with Daniel Yergin's The Prize led to a protracted study of the bloody, fiery history of oil and then to Trabish's Oil In Their Blood "trilogy" (http://www.oilintheirblood.com), a pair of historical novels on oil history still waiting to find a happy ending.